Gilts - Index Linked

cepheus

Here is a good explanation of how to compare them with conventional gilts (written in 2010)
Here is an explanation (beware of the figures being written in 2009)

From yesterdays article in Thisismoney comparing gilts with savings certificates

Although the rate of interest (RPI + 0.5%) is lower than on the similar certificates withdrawn 10 months ago (RPI +1%), this is still attractive compared to the market rate for five-year real yields. With the same government credit risk, the 2016 index-linked gilt yields, bought by institutions, are worse value, priced at RPI minus 0.5%. That's 1% lower yield than these certificates, which are only available to savers. And the NS&I product is tax free!

So for taxpayers the yields are outstanding. With the break-even inflation rate on the 2016 linker at just 2.9% on an RPI basis, so maybe at 1.9% on a CPI basis, this implies inflation below the Bank of England target level on average over the next five years, the absolute level looks good too

Read more: http://www.thisismoney.co.uk/savings-and-banking/article.html?in_article_id=534278&in_page_id=7#ixzz1N46240cz

nxdmsandkaskdjaqd

Aegis wrote: »

Pros:

You know exactly what income you will get out of directly held gilts
You know exactly what the capital value will be worth at the end of the term (i.e. if held to redemption)
They're backed by the UK government and are therefore rather unlikely to fail to pay
If held in an ISA they will be entirely tax free

Cons:

If you intend to sell them before the final redemption date, the capital value of the gilt is variable
The overall yield can be difficult to calculate if you're unused to the idea that the income is based on the nominal value, not necessarily what you paid for it


An additional fact is that these tend to rise and fall in value without being correlated to the stock market, so if you're looking for a little diversity they can be useful. On the other hand they're unlikely to give stunning returns compared with equities.

What would be the situation if these Gilts are purchased within an Stock and Shares ISA (Unit Trust or OEIC)? The holding to maturity would not be applicable as you can buy and sell at any time?

pqrdef

Loughton_Monkey wrote: »

The moral of this story is that you would only invest (rationally) in Gilts under three curcumstances. 1. You are 'happy' with the return, 2. You keep it until maturity, or 3. You think interest rates will go down.

SInce I do not believe item (3), I wouldn't touch any long term fixed interest (Gilt or no Gilt) with a bargepole. Interest rates are only going one way. To invest long term at today's interest rate seems to me a trifle silly.

Real interest rates can still get worse before they get better.

Your argument can also be applied to shares. Negative real interest rates are propping up most asset prices. When market interest rates rise, other investments will look less competitive and money will be sucked out.

But with index-linked gilts, the coupon is low and not very interesting. The effective interest rate is RPI inflation + coupon -which means they aren't fixed-interest stocks at all. So if market interest rates go up because of inflation, the effective interest on IL gilts will tend to track the market.